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London - Supply outages in South Africa are set to push the platinum market into deficit this year as shipments from SA fell by the equivalent of more than a month's demand, refiner Johnson Matthey said on Tuesday.

The platinum market is expected to swing into a 400 000 ounce deficit this year from a 430 000 ounce surplus in 2011, largely due to a 605 000-ounce drop in sales from South Africa, which accounts for seven out of 10 ounces of world supply.

However, weakness in near-term demand from industrial users, chiefly in the car industry, is likely to prevent a return to the record highs at $2 290 an ounce platinum touched in 2008.

"There is no suggestion at all that these events in South Africa could affect supply of ready material to the market, and we do know that the industrial customers have got themselves very well hedged over the last couple of years," JM's general manager Jeremy Coombes said.

"They are not coming into the market very much, so a lack of buying pressure is probably depressing prices at the moment."

JM expects to see platinum prices in a range of $1 400-$1 800 an ounce in the next six months, with an average of $1 625 an ounce, less than 4% above current levels.

South African production is expected to fall more than 12% this year to 4.25 million ounces, its lowest since 2001.

Months of unrest in the mining sector have hit platinum production, threatened growth in Africa's biggest economy and drawn criticism of President Jacob Zuma for his handling of the most damaging strikes since the end of apartheid.

Recycling of spent autocats are set to fall more than 15% to 1.035 million ounces this year as lower prices made reclaiming metal less attractive, while jewellery recycling is also set to drop 3% to 785 000 ounces.

Platinum demand also softened, preventing a harder swing into deficit. Offtake by the automotive industry slipped to its lowest since 2009 at 3.07 million ounces.

Overall gross demand is set to decrease only marginally, however, as a 10% rise in jewellery buying to a three-year high prevented a larger drop.

Tough conditions in South Africa are likely to keep supply next year at similar levels to 2012, JM said.

"Looking at the rand basket price over the last three years, it hasn't varied much at around R9 500-10 000 per PGM (platinum group metal) ounce," Coombes said. "So you have static rand income, and yet costs have been going up."

"They are cutting capital expenditure, therefore they are cutting their ability to expand. This year there have been a number of closures, which have taken 100 000 ounces of capacity out of the market, so it's difficult to see a rise in supply."

Palladium eyes biggest deficit in 12 years

The palladium market meanwhile is expected to record its biggest deficit since 2000 this year as mine supply and sales of Russian state stocks dwindle, while demand from the Chinese and US car markets climbs.

Sales of palladium from Russian stocks, a major supply source for many years, are expected to drop to just 250 000 ounces this year, their lowest since 2004.

JM says palladium demand for autocatalysts is expected to rise 7% year-on-year to a record 6.48 million ounces. Demand growth is expected to be strongest in the United States, at 14%, more than twice the rate in China, it said.

In 2013 it sees another record year in autocatalyst offtake.

Investment in palladium exchange-traded funds, which issue securities backed by physical metal, and have proved a popular way to invest in commodities in recent years, is expected to rise after hefty outflows this year, however, JM said.

Jewellery demand is likely to struggle to improve after falling by more than 10% this year, and by more than 20% in its biggest market, China. Chinese buying will likely decline again in 2013, it said.

Supply is also likely to grind lower next year, it said, with mine output from Russia expected to ease and South African supply struggling to increase, though a rise in recycling could help balance that.

Despite tightness in the market, palladium, like platinum, is unlikely to see much of a near-term price response, JM said.

"The fundamentals are giving us one message - this market is short of metal on a supply/demand balance basis. But the market itself is not illiquid," Jeremy Coombes said.

"We have the surpluses of previous years, the metal that Russia sold into the market is there somewhere. It hasn't been bought by consumers, it's there, and it's available to come back. So it does tend to act as a bit of a depressor on prices."

JM expects palladium to trade in a $550-$750 range next year, with an average of $650 an ounce.

Johnson Matthey also predicted a tight market next year for rhodium, which swung into deficit in 2012 for the first time since 2007, a year in which prices on average were six times higher than they were this year.

"Some consumers have been buying forward over the last few years, and in some cases buying forward quite significantly long-dated forwards," Coombes said. "The price effect of the forwards was in the past, but the demand effect is now. The demand effect is not in the market."

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